TIVP016: Uber (UBER): Cash Burner To Compounder? w/ Shawn O’Malley & Daniel Mahncke

27:43There's a self-reinforcing feedback loop here working in Uber's favor, which is why I see Lyft as being almost a secondary competitor. No one seriously thinks Lyft can beat Uber, and not many even think Lyft can dramatically increase its market share either. My feeling is that Lyft will probably always be relegated to being the backup plan in case you can't get an Uber booked. And maybe that's an okay business to have, but it's certainly not as good as Ubers. I mean, it makes sense since the whole idea of getting an Uber is convenience. And once Uber has a network where it only takes a couple of minutes to get one, there's pretty much nothing that Lyft could offer to take market share away from Uber.

28:26And it's similar to social media apps, for example. I mean, even if you would build a better Instagram today, the power of Instagram is its user base. I'm on there because my friends are on there, right? And the power of Uber is its vast network. If it takes less time than getting a Lyft, I will always call an Uber. So if time is convenience and convenience is what Uber is selling, then they will always have the number one spot. And it's very hard to take that away from them. Before we fall into the trap of only looking at it from a Western lens, what about other parts of the world? How does competition look on a more global scale?

29:06Lyft is, broadly speaking, the second biggest competitor in ride-hailing. Though, as I was saying, that doesn't make it the toughest competitor for Uber. Different markets have their own ride-hailing services, and those regional competitors may be more entrenched than Uber or Lyft. So that creates challenges when trying to scale Uber into every possible area to have the maximum global network effect achievable. Lyft has around 8 % of global market share in ride hailing, but 24 % of that is in the US. And it's pretty much entirely concentrated in the US. And we already know that Uber towers over them there.

29:44Whereas with Grab, which is basically the Uber of Southeast Asia, Uber did try to compete with them, but exited when they realized they couldn't make up ground against a company that had a head start and for all intents and purposes was using their own playbook against them there. Uber pretty quickly recognized that it was at a disadvantage and sold its operations to Grab and Southeast Asia in exchange for a 27.5 % stake in the company. And that has since been diluted down a bit, but I actually really liked the strategy overall. It's very pragmatic. If you can't beat them, join them, right, as they say.

30:20And ideally, I'd want Uber to dominate the entire world. But if that's not possible, then it's a very reasonable allocation of capital to look at where you can't win, accept that reality, and invest in who will be the winner of that market so you can still benefit. Grab IPO'd on the Nasdaq in late 2021, actually. And it's an interesting company in its own ways. I'm not as excited about it, though, because just structurally, the company hasn't proven it can earn a profit yet. And that may be due to the reality that it's more difficult for them to reach the kind of scale outside of Southeast Asia that Uber already has, and that has enabled it to be profitable.

30:58Just to take a step back and look at ride sharing globally, you've got Uber and Lyft as a duopoly in the US. And then in Latin America, Uber is the market leader again, but there's competition from Chinese companies like Didi. And then in Europe, As you alluded to, Daniel, there's a handful of competitors that you might know, like companies like Bolt, which is from Estonia, FreeNow. And then there's a Russian company, Yandex, that Uber used to own a piece of. You know, when I think of Bolt, the first thing that comes to my mind is their scooters. Their scooters are everywhere. And people my age, they use them for almost every trip they need.

31:36Like if they go to the gym, they will take a scooter. If they need to shop for groceries, they will take a scooter as well. If you need a car, most people that I personally know use Miles. And Miles is an app where you can quickly rent a car for yourself. And then the app shows you a car close by. You can drive to wherever you want. And then the car is free again. But that's not the idea of Uber. So if you need a car and you cannot drive yourself, for example, after a night out. I think you mentioned that as well. Uber is still the biggest player in Germany and I think in most of Europe as well.

32:09despite other options like bold or free now i think generally you could say that the european market also because of the regulation is just a lot more fragmented than the u.s market because the whole idea of uber there is totally different the picture is definitely messy in europe and i appreciate you painting some color around it from a market share perspective uber is actually the leader there, at least across Europe generally. But its lead just doesn't feel as rock solid as it is in other places. And going back to Yandex quickly, that Russian Uber I mentioned, Uber had partnered with them in 2017 through a joint venture, but that has, for obvious reasons, become increasingly problematic.

32:55And now Uber has exited Russia entirely. So that market is basically just a lost cause for them. And this goes back to the point that a number of companies saw what Uber was doing in the US and recreated it in their countries before Uber could expand there, which is how you get all these arrangements where Uber is instead investing directly in some of these regional winners or doing joint ventures with them. Again, Uber has found a number of interesting ways to get around this problem. And in the Middle East, for example, that meant acquiring a company called Kareem. Through Kareem, Uber now dominates the UAE, Saudi Arabia, and Egypt and then turning back to Asia.

33:33Uber did the same with Didi in China as it did Grab. They exited China, ceding the country to local competitors while taking a 17.5 % stake in Didi. And maybe now you can see why I mentioned Uber's crossholdings as being so important earlier as really necessary to understand the value of not only the companies intrinsic value, but also in a way their operating strategy around the world. It speaks for Uber's management, though, not to fight in a battle that would cost a lot of money and is probably lost anyway. And additionally, you have significant stakes in the regional champions. And those are investments that could compound over time and then again add to Uber's intrinsic value.

34:15Especially since Uber cannot only provide money or funding, they can also help improve the operations with all the expertise they have, right? But still, there's also a risk of exiting markets and then backing the wrong horse with their investments in the region. So how successful have Uber's investments been up to this point? And how do you see that strategy long term? The playbook of investing in competitors has worked better in some places than others. You're right. Like in China, Uber couldn't compete there. So owning part of Didi made a ton of sense. Yet now, as sentiment on Chinese markets has soured in the last few years, that investment in Didi is worth a fraction of what it once was.

35:00Uber's sister stake in Didi is still worth$2.6 billion, but that's down from the roughly$6 billion valuation their investment had when they first sold their operations off to Didi. So I don't want to make it seem like Uber has benefited massively from exiting markets and investing in local competitors instead. that that bet on Didi hasn't created any long-term value for them and came with opportunity costs of losing out on the Chinese market over time. And last but not least, the only other major market we haven't really talked about is India, where Uber is the second largest market share behind a company called Ola.

35:37With the exception of China, Russia, and Southeast Asia, Uber is either the market leader or at least a major player in just about every sizable country globally. So I do think it's promising as they continue to leverage their scale and financial firepower to expand in different ways around the world. I should also mention that even though Uber's mobility business has a global presence, it's very concentrated in just five cities. LA, Chicago, New York, London, and Sao Paulo, Brazil made up 20 % of all of their gross bookings for Uber rides last year. And if any of those cities have dramatic changes in regulation or competitors that become particularly aggressive about running promotions there, it could have serious consequences for Uber's results.

36:23I was pretty surprised when I saw this mentioned in Uber's 2025 annual filing. It's just a totally different structure than our portfolio company, Airbnb, which is a similar company in some ways and also faces lots of regulatory and competitive risks, yet no city makes up more than 2 % of its revenues, which is just a totally different picture. It is really surprising that a company as global as Uber is so concentrated in just five cities. I mean, we're not even talking about countries, but cities. Of course, this adds a layer of risk, especially with all the regulatory background that you mentioned and some of those cities.

37:00And we've already discussed New York, for example. But despite their focus on diversifying globally, Uber is also diversifying in terms of business segments. What are the ways in which Uber can continue to grow its business beyond their main business that we all know of? What's been really interesting to me about studying Uber is learning about all the different ventures tied to their mobility division. They've got a program called Member One, which offers$0 fees on food and grocery delivery, 6 % back in the form of credits on rides, and discounts on certain orders. And then there's Uber for Teens, which is a program that's live in 50 countries now and enables teens to create their own riding profile to order Ubers through while their parents can track their exact location when riding at all times.

37:49And then there's Uber Black, which is sort of for corporate travelers seeking luxury vehicles and first-class services, as well as Uber Courier, which is a service that allows users to send and receive packages using the Uber app. So drivers can actually use Courier as a way to earn extra money by delivering packages while completing Uber rides. And then in Japan, Uber has been partnering with taxi businesses there that has brought on an additional 20 ,000 vehicles to the platform. And then on top of all of that, there's Uber Health, which I think is a brilliant service for non-urgent medical travel where Uber partners with a number of various medical institutions for this.

38:30So maybe you need someone to pick you up after a surgery or something like colonoscopy. Folks could rely on special Ubers to arrange timely transport for these very important things that are maybe not life-threatening. So I'd imagine this is especially helpful for people who live alone and for the elderly. And again, it just makes a ton of sense for how Uber can create value here. And it's a great way to continue making their ride sharing service even more accessible on the margins. There's also always the opportunity to run more ads, which is another subtle advantage of Uber's scale. They're big enough now that advertisers want to work with them to show ads in drivers' cars.

39:11and it's a win-win because drivers can earn a little extra money by setting up screens to show ads to their riders and if you haven't seen it these are usually in the back seats of cars and it embodies the old expression that ultimately every company is an advertising business at least for ones that rely on network effects like uber it's actually a much more powerful idea too i should say than it first sounds because uber has so much data on where people are going you can imagine that advertisers may want to run location-based ads through them. So it's not entirely just billboard ads flashing on some screen in the back of an Uber.

39:47If you're Ubering to a basketball game, a nearby bar might want to target you with ads while you ride in your Uber to the venue. Or if you're Ubering to work, some local restaurant may want to hit you with an ad that plants a seed in your mind for what you'll have for lunch for that day. And my baseline view is that having demographic data on people and knowing exactly where they're going in a moment in time is just really, really valuable, especially when you have their captive attention as they sit in the back of a car. And we haven't even gotten to Uber Eats yet, but advertising is also a very big part of the story there, especially for in-app ads.

40:24I just realized how different my experience with Uber is compared to the US experience and personally your personal one. I've never seen an Uber with ads in the background or anything like that. And services like Uber Health could definitely become a much bigger thing in the future. And the ads business, even in the short term, I mean, if you have high quality data like that, there's definitely the option for many companies to use that to leverage their business. But let's turn to Uber Eats now. This isn't just about the future because it's big already. So tell us, how big exactly and what part does it play in Uber's ecosystem?

41:06Yeah, let's do it. Let's talk about Uber Eats. Just to give some stats on how big this business has gotten, there are now over a million active merchants selling through Uber, up 16 % from last year. And sales per merchant are increasing on average too. And even more promising is the potential for further penetration. In Uber's 10 most penetrated delivery markets, they have about a third of available merchants listing their products. So there's room to grow considerably if they can even get half of all merchants in an area to list their products on Uber Eats, which is ambitious but not totally crazy, especially as a network effect around Uber Eats strengthens.

41:48And the quality of the service is just getting better too. Defect rates, for example, are declining, meaning more orders are being delivered accurately through Uber Eats, which only increases the value proposition of the service if you have more trust that you're gonna get exactly what you asked for, right? If you have more confidence that your order from the local Mexican restaurant won't be messed up, you're probably more inclined to use Uber Eats. So Uber is finding ways to improve their quality control. And again, I just see that as being very promising. Then to go back to the conversation about ads, merchants can run ads on Uber Eats to drive sales based on certain searches.

42:27So as an example, you might search for Mexican food in your town, and the first result could be a sponsored listing from Chipotle. Beyond the fact that that is just a powerful tool to improve the business's monetization, I think it also strengthens the network effect around Uber Eats amongst merchants. If the restaurant across the street from you is not only earning extra sales from working with Uber Eats, but also runs aggressive ads that pull business away from your restaurant, all of a sudden you're compelled to join Uber Eats and maybe even run your own competing ads there to offset that. And if that thinking is even partially true, it's a really effective way to increase the supply of merchants on Uber Eats, which adds more options for customers and again makes the service even more useful and valuable.

43:15And it just compounds upon itself. I'll just say that generally I've been so impressed with what Uber has been able to do with ads. It's not an easy thing to start up from scratch, and yet they've turned ads into a billion dollar business in a very short period of time. The more you say about the ads, the more I would like to dig deeper into that business. But staying with Uber Eats for just a second. While the main business is about delivering restaurant food, they also introduced grocery delivering. What's the idea behind that? Is it a better business to be in or is it just another way to expand the offering?

43:52Restaurant takeout and delivery are the bread and butter, but grocery shopping is sort of the golden goose a lot of these companies are all after. on paper it's just a better business intuitively because grocery shopping is a required habit for everyone and therefore the tam is probably wider and also it's a recurring habit people shop for groceries at least once a week probably and if you can get people in the habit of using your service to order groceries weekly for delivery then that's a really sticky and stable business you don't need me to spell that out for you and it is much more so than getting people to use Uber Eats whenever they might randomly decide they don't feel like cooking on sort of an impulse.

44:33Instacart is, of course, the big leader here. And as Instacart tries to expand its reach, they've partnered with Uber Eats such that Uber Eats is now integrated into Instacart, meaning Instacart users can order restaurant delivery through Uber Eats in the Instacart app. That was a lot to say, but hopefully you followed along with it. And it's interesting to me that this dynamic doesn't go both ways. There is no Instacart integration in the Uber Eats app. And instead, actually, Uber directly competes with them by offering grocery delivery services in its own app. So that imbalance there sort of signals to me as an investor that Uber has the power in the relationship here.

45:13And as part of that partnership, Instacart has this membership service called Instacart Plus that charges$100 per year for unlimited free grocery delivery for orders over$10, as well as restaurant delivery through Uber Eats with free delivery on orders over$35, I think. Well, to me, that sounds like Uber is in a good position to take market share there. But I'm asking myself, how sustainable is that? In Europe, online grocery shopping is not that big of a thing yet. I think that's different in the US, but how optimistic are you that Uber can not only take market share from Instacart, but also defend that position against the big retailers who seem to do similar things?

45:59The tricky thing about grocery delivery, going back to that conversation, is that intermediaries like Uber and Instacart are much likelier to get cut out of the equation than with Uber and self-driving vehicles. So Walmart, which makes up more than a third of all online grocery sales in the U.S., then Target, as well as Amazon with Whole Foods, have shown how grocers can push out third parties by building their own delivery apps and fulfillment centers, especially for home delivery or pickup, which rely heavily on automation and AI. More than 4 ,000 Walmart stores offer same-day delivery, and the costs are offset by digital advertising for online ordering and through membership costs for Walmart Plus.

46:41So again, you just have this strong incentive for grocers to eventually remove middlemen and take over these operations themselves, assuming they can afford to do so. And that gives me some pause and suggests that eventually third-party grocery delivery services can only work with smaller regional grocers because the larger chains with more resources will build out their own delivery systems. We've already seen that unfold. So I'm definitely not as optimistic about the grocery side of Uber Eats. but I also don't see the same risk in its core restaurant delivery business. The vast majority of restaurants are these independent operators who don't have the resources to manage an app for ordering and also be able to deliver the food to customers in a timely manner.

47:25It's just too costly and way, way beyond their core competence. So, of course, it makes more sense to just tap into Uber's network and the capabilities that Uber Eats offers for them. And Uber is experimenting with some cool stuff here, too. reportedly they're working on autonomous delivery robots for groceries and i've actually seen this kind of thing in action myself on college campuses and it works well my parents live near a college campus and whenever you ride through it you see all these robot couriers on the sidewalks and they're almost like little r2d2s out there for any star wars fans and basically they're box looking robots that get loaded up with food navigate to dorms and then deliver everything and i'm skeptical of how you could do that elsewhere, but it does work particularly well in these insulated, walkable college campuses and maybe certain cities in the US.

48:17But besides that, the distances they need to travel start to complicate things. And you can imagine there's some real traffic hazard situations that could arise. And maybe you use drones for certain deliveries, which I know Alphabet is working on, but I'm not sold on it yet. I think self-driving Ubers will hit scale much faster than autonomous food delivery. Just personally, I can see myself hopping in a Waymo that I ordered through Uber way sooner than I'd pay to have my groceries delivered by a robot. I also live close to a couple grocery stores, so I'm probably biased, but I mainly use Uber for rides.

48:48And I don't pay for grocery delivery because I'm one of those people who likes to wander the store and pick out exactly what they want. And I don't want somebody else touching my fruit, for example. Well, same here. I mean, I like to go for walks and the walk to the grocery store is just something that I like to do. So I don't want a robot to take that away from me. But we've talked about Uber Eats for quite a while now. And you haven't even yet mentioned DoorDash. Isn't DoorDash the market leader by a pretty wide margin? And how is the dynamic there? Could Uber Eats take the number one spot? Or are there competitive advantages working in favor of DoorDash that are just too hard to crack down for Uber?

49:31It's definitely an oversight on my part. Uber eases to food delivery as Lyft is to ride-hailing in the U.S. I think it's destined to be the second biggest player in food delivery since DoorDash has roughly two-thirds of the market share. DoorDash has clearly been the winner so far. Food delivery is their core service, so it's not a huge surprise that they're the best at it. And all of their attention goes to it naturally, whereas Uber is trying to do a bunch of different things, which just makes it hard to compete well on any individual measure. And by some measures, DoorDash's customer retention rate is twice that of Uber Eats.

50:06So it's hard for me to simultaneously argue that the odds are stacked against Lyft in ride hailing and then pretend the same isn't true for Uber Eats versus DoorDash. I think it can be a solid and maybe growing business, but I don't see any plausible pathway for them to seriously grow their market share in the US, which is certainly not their only market though. My feeling is that Uber is more focused on using Uber Eats as a way to strengthen membership packages that extend across its various platforms. Whereas DoorDash is truly trying to dominate the food delivery market at all costs. So in part, they're just coming at it from different perspectives.

50:44I don't think Uber Eats has the same goals, at least not in the US. We mentioned those Uber One memberships already, but it's a compelling subscription service because it offers both savings on rides and food delivery. And in some ways, beyond being a decent business in its own right, you might say Uber Eats really exists so Uber can leverage it to cross-sell various membership packages. And we see the same thing with Amazon. They have all of these peripheral businesses that really only exist to be part of an Amazon Prime membership package. The reality though is that they're not just competing with DoorDash, they're also competing with Amazon who I just mentioned, which is intimidating.

51:20There's this quote from Uber's CEO where he says that, while Amazon is the global leader in e-commerce, he believes Uber can be the global leader in local commerce. So maybe their plans with Uber Eats are more ambitious than I give them credit for. You know, subscriptions seem to be a recurring theme with our companies. You mentioned it for Amazon. I mentioned it a couple of weeks ago with Nintendo. But it's just because there are few better business models than subscription services. So it's not surprising Uber would try to expand their offering to upsell those memberships. But judging by the CEO's comments about the global local commerce leader, we might underestimate the vision they have for their business.

52:04And on that note, is there anything else we should know about Uber's delivery business unit? One last thing I'd mention is Uber Eats Direct. We already talked about how some grocers are trying to cut out middlemen for ordering delivery and how this is also harder to do for restaurants. But Uber is still trying to get ahead of the innovators dilemma here, which just for the audience is this famous dilemma where the incumbent leaders in a market aren't incentivized to disrupt their most profitable business. If there are competitors on the horizons, experimenting and building alternatives that may eventually displace them one day.

52:39And all you have to think about is Google search with encyclopedias. And Uber is addressing this with restaurants by offering Uber Eats direct, which is a way for them to integrate their point of sale systems with Uber's API. And that's kind of technical jargon, but instead of just listing their restaurant on Uber Eats, restaurants can actually embed the ability to do delivery orders through Uber Eats directly into their own websites and apps. So they can work with Uber Eats, but they can do it through their own website. And I'm sure these places still list on Uber Eats as well, but they just get a lot of traffic from their own websites still.

53:18So it just makes a lot of sense for them to add that capability directly on there. It's a really smart idea in summary and a great example of the kinds of things Uber can do as a tech company. And I think it addresses the innovator's dilemma to some extent because it just makes it even more compelling for restaurants to work with Uber. It makes them more dependent on Uber, which probably reduces the risk of disruption to them going forward. In investing, there has been this trend for cloning big investors. On that note, just recently, Bill Eggman has very publicly, Onyx to be precise, announced a$2 billion investment in Uber.

54:02What do you think about that? And if Bill Eggman invests, is it bullish or is it bearish for the stock? I love the way you phrase it. Ackman has such a mixed reputation these days. And I am certainly no Ackman chaser following him into stocks. But I did make a point of trying to understand what was making him bullish on Uber because with somebody of the pedigree and track record he has invested in a company, it's worth your time to understand why. And he cites a few things in his presentation to his Pershing Square shareholders after they took a$2 billion plus stake in Uber. and that did send Uber stock up 7 % immediately because a lot of people are going to follow someone of his profile into a trade.

54:44And he claims that he thinks autonomous vehicles are actually a more than$1 trillion opportunity that can entirely reshape Uber's business for the better. And on Twitter, Akron wrote of his bet that, quote, we believe that Uber is one of the best managed and highest quality businesses in the world. Remarkably, it can still be purchased at a massive discount to its intrinsic value. This favorable combination of attributes is rare, particularly for a large cap company. And so Akron's bull case on Uber isn't incredibly unique or anything, but it boils down to believing that the company's 20 % take rate, which is the fee they charge on bookings, is low relative to the value they create, and that Uber's valuation is cheap in price to earnings ratio terms, given the company's growth history and management's expectations about growing in the future.

55:36And I'd guess that the reason Uber is priced more cheaply than it otherwise would be, given the quality of its business, is because of this massive cloud of uncertainty hanging over the company with autonomous vehicles. But again, Ackman and Uber's management teams really differ with the market and say they don't see that as a major risk. And if anything, they see a significant opportunity. And the idea in short is that while companies like Waymo could theoretically cut Uber out as a middleman for connecting riders with self-driving vehicles, that ends up being much easier said than done. For example, attempting to replicate Uber's capabilities as opposed to partnering together is almost economically irrational, given that Uber has aggregated 170 million customers together and has the most advanced rider matching technology, which helps to significantly boost utilization rates and revenues and all that good stuff.

56:28And at the heart of this is really that it's very inefficient for an autonomous vehicle company to also try and do what Uber does. Demand for rides is not constant throughout the day. There are peak periods at the beginning and end of the day and then dramatic fall-offs in demand. So if you build a fleet of autonomous vehicles that are trying to cut out Uber, they're going to be sitting idly most of the time and not be fully optimized. Without being too knowledgeable about Waymo's technology, it does seem like the partnership between Waymo and Uber seems to be a win-win situation. If Waymo would try to cut out Uber, it's probably hurting both companies.

57:07Uber has more competition and Waymo carries the costs of a massive and inefficiently managed fleet of vehicles. Just like Uber decided not to participate in expensive market share wars with international ride-sharing companies, it seems like Waymo's best move would be to do the same here and instead just partner with Uber to get the best of both worlds. The beauty of Uber's model is that the vehicles are not on their balance sheet, and drivers can opt to make themselves available in response to demand in real time. Thus, Uber drivers can be incredibly flexible about responding to ride requests and a lack thereof.

57:46Another way to maybe say that is that supply on Uber's platform naturally adjusts to demand. And for, say, Waymo, to try and allocate XYZ number of cars to a city that will displace Uber, well, the reality is that they're either going to under-allocate vehicles or over-allocate them at any given moment in time. There's just no way to perfectly match demand with a fixed supply of vehicles driving around, which is why it's better to deploy a more limited fleet and just partner with Uber, tapping into their network for bookings, and then the vehicles could be used for other purposes or as just an occasional alternative to a regular Uber.

58:21But it's hard to see how they could cut out Uber entirely without massively misallocating resources. And we are already seeing early illustrations that autonomous vehicle companies understand it's in their best interest to partner with Uber, given the infrastructure it has in place around customer service, insurance, and the network effects of having so many people who already use its app. Uber has 14 autonomous vehicle partners, including Waymo, across its mobility, delivery, and freight divisions. And according to Ackman, at least, that is likely to expand over time. And on top of that, 50 % of the bookings on Uber are for delivery, which given the human element involved in picking up and delivering food, means that Uber Eats is almost certain not to be adversely affected by autonomous vehicles anytime soon.

59:08And additionally, Uber is further insulated because more than 50 % of their mobility business bookings are from outside the US. And autonomous vehicle adoption is going to be much slower in less developed markets like Brazil and India or in places like Europe that are likely to have more stringent regulations on implementation. So they have some natural buffers in their business and they choose to truly partner with companies like Waymo. And if you take that at face value, then you can certainly see why Ackman is bullish and why he thinks the market is overly concerned about Uber's business being fundamentally disrupted by autonomous vehicles.

59:43You mentioned that Uber already partnered with autonomous vehicle companies like Waymo, but also a dozen others. Could you paint a little more color on how exactly those partnerships look like and what management has said about the outlook going forward for AVs? It seems like Blackman is pretty bullish on that. The early results of partnerships like the one with Waymo are really promising. In earnings calls, Uber's CEO has emphasized that the company is very, very well positioned for autonomous vehicles. Apparently, the opt-in rates for Uber rides through Waymo is considerably higher on the second ride than the first ride, showing that people are at first hesitant, naturally, to ride in a self-driving car, and then they love the product very quickly.

1:00:27So much so that Uber's management believes Waymo rides can be priced as a premium product, which is how we get back to talking about autonomous vehicles actually being something that improves the business. And that's especially true when you consider that these rides are cheaper to deliver, because there's no human labor involved. Uber's CEO has said that autonomous vehicles might represent 10 to 15 % of the mobility market down the road and then continue to scale from there into the horizon. And as such, he imagines that Uber may initially need to invest in directly owning some of these vehicles, but eventually, and I thought this was quite interesting, he believes there will be financial companies that will arise similar to REITs for hotels and office buildings, but instead for fleets of autonomous vehicles that will be run as businesses through Uber.

1:01:12It's sort of similar to how Marriott operates hotels, but doesn't own the real estate. All the real estate is owned by a real estate investment trust, or REIT, aka, that collects rent from Marriott. And that's the idea here. You might have fleets of self-driving cars owned by financial companies who take on the asset on their balance sheet, whereas Uber operates the cars from a business sense by leveraging them in their ride-sharing network. And it's a pretty cool idea, honestly. And once again, the approach with self-driving cars is similar to what they've done with DD and Grab. At first, they tried to compete directly with an autonomous vehicle team inside of Uber.

1:01:46And then when they realized how costly it would be to do so, they opted to simply invest in their competitors. In 2020, Uber got out of the self-driving vehicle business by selling those operations to a company called Aurora, and in exchange, received a 25 % stake in them. And I didn't know anything about Aurora, and I don't really know much about them now, but But I'm sure it's a promising company for a few reasons if Uber chose them. And after I looked them up, I was kind of fascinated to learn they are a publicly traded company. And it was founded by the former chief technology officer at Waymo, as well as the former head of Tesla's autopilot team.

1:02:22So there you go. That pretty much explains why they're keen to partner with Aurora. The powerful thing about Uber's approach to this is that they keep their business model asset light. and at the same time they managed to stay at the center of all these developments that you mentioned and that's strengthening their own market position. Nevertheless this is a bit of a bet on the future part of the present is the seven billion dollar share repurchase program that they just recently announced as a company that as we have discussed today seems to have endless reinvestment opportunities. Is a stock repurchase program actually the right way to go?

1:03:06The share repurchase program was announced last year, as you say, and it hasn't been without controversy. And presumably it exists to offset the company's massive stock-based compensation costs, which have been very dilutive. Yet it raises the question of whether the cash should be used to repurchase shares or if it'd be better off just reinvesting in growing the business while also kind of highlighting the ugly reality of their stock-based compensation over the years and how even though it's treated as a non-cash expense, it is a very real expense for the owners of the business. And after being criticized in an FT column, Uber CEO wrote back in defense of the program.

1:03:45So I'd like to just take a moment to read part of his response here. He says, quote, Quote, I believe Uber's best days are ahead. We have a large utility-like business that is still in the early days of penetrating its market. This has led us to conclude that a consistent buyback program is the right answer for Uber. We are taking the humble investment route of dollar-cost averaging over what we hope will be multiple years. Of course, this does not preclude us from taking a more aggressive stance on capital returns if our stock were to dislocate in the coming years. It is also worth emphasizing that the value creation from a buyback program doesn't happen in one, two, or even three years, but by doing so in a systematic and predictable manner as we continue to scale profitably.

1:04:31And he continues by saying, as Uber CEO, I have to bet that my engineering pod can not only return 20 % plus next year, but also earn a similar 20 % plus each and every year afterwards.

1:04:54He adds on top of that again, just to keep reading here, quote, that comes with a financial cost, but more importantly, a human and organizational cost. It has been my experience of providing a stable, challenging, but consistent work environment is hugely beneficial to our team. They can be focused on work rather than networking for their next job in case there is a layoff. While many other tech companies overhired during the pandemic and had to subsequently fire many of those same employees, we have been disciplined about our growth and focused on building great products versus endless restructuring.

1:05:28So that was a lot to read. I'm sorry for putting you through it. That's all pretty interesting, but the counter response is that since Uber's CEO has more than$100 million worth of stock options that vested when the company hit$120 billion valuation. And for context, it's around$150 billion today. He was arguably just maybe trying to juice the stock with buybacks, even if done at elevated prices that destroy intrinsic value, just so to ensure his own compensation package comes through. And that is a very, very pessimistic way to look at things. But as investors, we do have to be pessimistic sometimes.

1:06:03And it's a fair point. If you follow the incentives that is exactly what he's incentivized to do, to push up the stock price irregardless of what is best for long-term intrinsic value. And that is the problem generally with incentive plants tied to market cap, as it is for Uber CEO, and not total returns for shareholders. Now, you've given a great introduction into the management team already. And one thing that almost every high-tech company, especially coming from Silicon Valley, has in common is a visionary founder. Now, Uber's founder has left the company many, many years ago already. So what do you think about the current CEO, despite what you already told us?

1:06:50His name is a little bit of a doozy to pronounce, so I won't keep repeating it more than just once. And that's probably why we've been sidestepping saying it a little bit, but yes, Uber CEO is Dara Khosrowshahi, and he replaced Uber's co-founder Travis Kalanick in 2017 after Kalanick became ensnared in a string of scandals, including allegations that he was turning a blind eye to workplace sexual harassment. And so Khosrowshahi is paid well because he's seen as this exceptional talent after having spent 12 years running Expedia, and he's definitely done some excellent things to turn the company around.

1:07:25I know that Bill Ackman, for example, has said Uber has an industry-leading management team that has done a lot to improve the operational discipline and capital allocation at the company, so that's a great endorsement to get. I've been really impressed in particular by how Uber's management has been able to leverage its two apps, Uber Eats and the regular Uber app, to cross-sell each other's services and all-around boost customer loyalty and engagement. Since 2021, the number of monthly users who use more than one Uber product has risen from 21 % to over 34%, which is even better than it sounds because they found out that folks who use multiple services from Uber end up spending over three times more than single product Uber users.

1:08:07And that's extremely compelling the first time I heard that, and it's still compelling to me, and shows just how sticky and valuable their services are for people once they branch away from just using Uber for ride hailing or only using it for Uber Eats. And related to that, they've also found that it's just much cheaper to acquire customers who use other Uber services than it is to try and market to people who don't use Uber for anything. So for example, they can use the main Uber app as a tool to prompt people to download Uber Eats to take advantage of certain promotions, or they can use the Uber Eats app to encourage people to download the Uber ride hailing app.

1:08:42And according to their investor update presentations, which are littered with some really great charts and visuals, the cost of acquiring customers from their own cross promotions is actually 50 % cheaper than their acquisition costs from traditional forms of sponsored marketing. And as a further testament to these synergies, management has said that about a third of their delivery orders come originally from the main Uber app, and about a fifth of their ride requests come from people using the Uber Eats app. I think for the most part, Uber's leadership is focused on the right things and finding ways to get more out of every single person who interacts with one or more of their services.

1:09:20For a while, people thought Uber might become a super app similar to the super apps that have become popular in China that allow you to do almost everything you can imagine in one place. But clearly, Uber is taking an approach with multiple apps, including an app specifically for drivers too, and that's been working well for them. It's not as ambitious as building an everything app, but it's certainly more practical. We've spent quite some time now talking about how Uber is operating in many different industries, and it seems there are even more options in the future. And then you have all the investments in ride-sharing companies around the world.

1:09:58How about we try to tie all of this together to value Uber, and you show us what you have come up with. Where to begin? I'll try to tie it all together, and that is the question, as always. At the top, I'll highlight that I try to build basic models based on management's guidance. And then I put checks in place if I think their projections are very clearly too optimistic, or I keep them in place if I think they're plausible. And with Uber, you've got some very positive projections going forward. Management has said they're targeting 30 % annual earnings per share growth for the next few years, driven by mid to high teens revenue growth, margin expansion, probably from advertising and then share repurchases.

1:10:42And I believe them. As we've outlined here today, I certainly can very plausibly see how that will all happen. And that is some serious growth for a company that is really not that richly valued, which means Wall Street either doesn't buy into that picture or I think some really bad things can happen to Uber down the road in terms of maybe being displaced by autonomous vehicles. But with the company now comfortably earning over$2 billion a year in operating profits while having$7 billion in cash on its balance sheet and no net debt. Uber is a very safe bet from a financial risk perspective. This is not a company that is going bankrupt anytime soon.

1:11:18That is maybe obvious to say to some people, but it's important to have said that as sort of a sanity check. There is some significant stock-based compensation, as we talked about, and that's a big problem. And I try to understand what their true earnings are. And typically, people look at free cash flows to do that. And this is often calculated as just operating cash flow minus capital expenditures. I took it one step further, though, to also net out stock-based compensation because that is a real cost that will either need to be reflected in shareholder dilution or in modeling out how many shares they'll have to repurchase to offset that dilution.

1:11:54So for the sake of simplicity, I want to just directly account for that dilution in my free cash flow numbers for Uber. And using these figures, I actually get an estimate that Uber earned$5 billion in free cash flow last year, which was negative as recently as 2022 and is up from$1.4 billion in 2023. So not to get too technical here, I don't want to drag people through the weeds of my model and I'm not doing anything super fancy, but that is the approach, or at least the approach I used initially. And as I look at it, it's immediately clear to me that Uber is not richly priced, as I've said. It's trading at roughly 30 times last year's adjusted free cash flow, which is very reasonable for a business with the growth prospects that Uber has.

1:12:36Another thing to know about Uber too is that since the business was unprofitable for so many years, they have billions of dollars of accumulated losses that they can carry forward to offset future tax bills, which on the margins helps to pad out things and just provides one more reason to me on top of many to be optimistic about the amount of free cash flow Uber can generate in the next few years if they're going to have a relatively lower tax bill. Throughout today's episode, you mentioned the similarities between Uber and Airbnb in terms of their platform model approach and also the regulatory risk that both companies definitely have or face.

1:13:16And I know you put together a similar model for the Airbnb episode recently. So how was that constructed and are there more similarities or differences to the Uber model? I took a slightly different approach in the model to focus only on operating profits as opposed to free cash flows, as we just talked about. Because Uber has a lot of cross holdings and tax benefits that make its net income and even reported operating cash flow a bit messy. So my premise is pretty straightforward. Estimate how gross booking values for mobility and delivery businesses can grow over five years. estimate the company's take rate by 2029, which again, I'll just say for the audience, is the percentage of gross bookings that they could capture as revenue from fees, and then estimate what the company's operating margin could be.

1:14:04Or another way to say that is their operating profitability. And there's a lot of digging into past financial results to look at trends and user growth and take rates and operating margins and so on. And I'll spare you from all that. And I should add that I focus only on the core business, which include mobility and delivery, and I left out Uber Freight since it's not popular and is also pretty small comparatively. But I'll get back to that in a moment and explain how I accounted for that in the valuation. With a very rough estimate of Uber's 2029 operating profits in hand after I've done all that modeling I just kind of discussed, I can then try and estimate a range of multiples the stock might sell for in five years after its growth has started to maybe slow a bit.

1:14:46And then I can discount that five-year value to a present value to determine what is roughly a fair price to pay for the stock today. And on top of that, I also added in the$8.5 billion of investments that the company carries on its balance sheet for owning stakes and some of its competitors like DD and Grab. And then I just generically tack on a 15 % margin of safety to protect myself from any overly optimistic assumptions in the model and give myself a little room for error. And yes, I should also mention that because I stripped out Uber Freight from my calculations, I added the unit in at the end with a$3 billion valuation, sort of treating it as a wholly owned subsidiary that they might sell off eventually.

1:15:29Since there were some serious talks a year or two ago about spinning off the Uber Freight division around that valuation I mentioned. Perhaps it makes sense adding some context just to that topic. While a spinoff can be a great way to kind of set free value for shareholders, it is important to do it in the right environment when valuations are high. The freight business, however, saw some headwinds when the spinoff was discussed, the demand was weak, and freight bookings declined. In that environment, you might not get the valuation you think the business would deserve. And then you just choose not to continue with the IPO.

1:16:09And that's basically what Uber did. Maybe that's just some context that helps folks listening to this understanding why you added back at the end and they didn't yet spin it off. Yeah, yeah, I appreciate you saying that. And again, this is not rocket science. It's all very subjective. To just go back to my model, though, to me, a 15 % margin of safety makes sense. But for you, maybe it's only 10 % or maybe it's 20 % Or maybe no margin of safety could make you feel comfortable with the uncertainties that Uber faces. The really important thing is just to not get crazy with the exit multiple, which is the valuation you anticipate the stock could trade at whenever you're ready to sell out.

1:16:46And for me, I say about five years generally. I base my range of multiples on, firstly, Uber's valuation ratios declining as the company matures and growth begins to taper off. And secondly, looking at some other big tech platform companies like Amazon, Alphabet, and Airbnb, just to see what's reasonable. Uber's enterprise valuation is around 55 times its operating profits, which is high compared to Airbnb, which trades at around 28 times operating profits. And Alphabet, which trades at below 20 times operating profits. Meanwhile, Amazon trades at over 30 times operating profits. But Uber arguably has the best prospects for further improving profitability and growth among any of those companies.

1:17:29So I have no idea if Uber's valuation will be closer to Alphabet's, Airbnbs, Amazon's, or at another level entirely in five years. But I'm pretty certain it will decline. And then I look at these other comps and decide a range of multiples that seem plausible to me. And I factor that into a weighted average value for the company. Not to keep forcing everybody to listen to a conversation about my model. but that is the idea very simply for how I approach things. And you know, I think it's perfectly fine going into some of the details because it's necessary to explain where you come from, right?

1:18:00But having said that, tell us what's your intrinsic value target? I think we deserve to know now. Yeah, to give you one number that contains a lot of assumptions in it, I get$75 as a fairly conservative intrinsic value target. And that doesn't account for the interest they earn on float, which is something I've covered with Airbnb, but they get paid up front and get to earn interest on that money before they have to pay it out. And they usually don't have as much float working in their favor as Airbnb, but it's still something to consider. It also doesn't account for much room for growth in the investments that Uber has in its competitors, but that is always possible.

1:18:36It also doesn't even really reflect the fact that they've relied heavily on promotions and discounts to secure market share in certain places. But as their position becomes more solidified, they can rely on those kinds of things less, which will just be very, very good for profitability structurally. And it doesn't anticipate that they can begin to reduce the share count as they get more aggressive about share repurchases either. I think that is possible, but with all these stock-based compensation they do, it'll just take a lot of repurchases over the next few years, which again, they're probably more than capable of doing.

1:19:09And it's just a question of how much stock-based comp increases and how willing they are to consistently do buybacks. Listeners can, of course, see my model and download it to play with for themselves by signing up for our free intrinsic value newsletter. As I said, though, I've probably been pretty conservative considering Uber's track record of growth, all the opportunities still available to it, and really just the advantage of Uber's scale and network effects generally. So I'm pretty excited if we could get Uber at or below$75 per share. I think we'd be taking some risks, namely with autonomous vehicles.

1:19:44But I just love these big tech platform companies. I love Spotify. I love Airbnb. And I really like Reddit. I just find their business models to be so promising. And if you can snap them up at a half decent valuation, then it makes a ton of sense to me. And Uber is definitely trading at a fairly attractive valuation. So that's how I'm thinking about it with Uber. I'm inclined to allocate a small position in the portfolio to them, maybe 2 % to 3 % or more. depending on how you see it, Daniel? Well, there are companies where I do not have a problem with not being a customer. Just recently, we talked about Montclair and I would invest in Montclair without being an owner of 10 Montclair jackets that hang in my closet.

1:20:27Now, with these platform business models, I like to have the perception of a customer as well. So I'm a user of Spotify. There's probably no app that I use more often than Spotify. I've booked 90 % of my vacations or trips in the last years with Airbnb. With Uber, I do not have the same experience. Uber in the US, like we mentioned today, is totally different from Uber in Germany. And lacking the customer background makes it a bit harder for me to assess the investment case than it is for you. But Uber has proved that it can be profitable. it has proven to stay on top of competition and it seems well positioned to benefit from a lot of those future trends that you have lined out today so combined with the reasonable valuation which it seems to have as well i think it can be a good addition to our intrinsic value portfolio though i would be in favor of a two to three percent position rather than say five percent or more but i think we're aligned on that right yeah it'll be a bit of a smaller stake than the bets we've made on Alphabet, where it's just a much, much more diversified business with a much better track record of operating profitably for a pretty long period of time.

1:21:44So of course, I feel better about getting Google at a fair price and adding it to the portfolio at a higher weighting than I probably do with Uber, where there are still some major overhangs. And especially like Like you said, it's harder for you to relate to what the company does and its value add. So I feel really good. I think a 2 % to 3 % position makes a lot of sense. It'll be technically our smallest holding, but it's still a decent-sized stake in a company, especially as we're trying to build a portfolio of around 20 names. And we'll probably build conviction in it over time, too. You might get more comfortable with it.

1:22:20I might get more comfortable with it. And we could increase that position. Or the opposite could happen. And we could find ourselves realizing that there's some other risks that we haven't accounted for. There's a change in the regulatory environment. There's a change in the technology with autonomous vehicles and our expectations around their adoption. Whatever it is, 2 % to 3 % feels like a pretty good way to frame things. So we have some exposure to the upside, but we're not going all in on a company that has some very big uncertainties lingering over its head. The great thing about having these deep dives is that we now know the business on a level where we know what to look out for.

1:23:00So in a couple of quarters, or maybe even in a couple of years, we know exactly what to look for. And if, for example, the advertising business is growing much further and much faster than it is currently, and it becomes a substantial part of the business, I myself would have a lot more conviction in the Uber business. And it's the same for other ventures that they are on. So I think building a small position of 2 % to 3 % is perfect from the start. And as you mentioned, seeing how Uber is developing can make the stake either grow in the future or even decline. But I think we're both pretty bullish right now.

1:23:37Otherwise, we wouldn't start this position at all. Well, there you have it, folks. That's all we've got on Uber this week. And we'll be back again next week when Daniel will pitch me on his idea for an addition to the portfolio and I will play interviewer. We'll sort of switch roles. As always, I will leave you with a quote. The legendary investor Phil Fisher tells us that if you are in the right companies, the potential rise could be so enormous that everything else is secondary. I hope Uber can be one of those companies for us, even if we only have a small stake in them. And there's certainly enough room for enormous growth still.

1:24:13With that, we'll see you all again next week.

1:24:21Thank you.